One of this Government’s missions was to deliver this – at the bottom end of the spectrum, with radical welfare reform and the extension of the tax-free personal allowance, and at the top end, with cuts to Gordon Brown’s vicious 50p income tax rate.

It is a tragedy, therefore, that this agenda, vital to building a healthy, pro-work and pro-enterprise society, is faltering. The child benefit reforms make a lot of sense in theory – it is morally and economically wrong to give the better-off a handout – but their implementation has turned into an appalling fiasco.

Not only are the changes horrendously unfair to single earner couples, with families on one income of £60,000 losing all of their benefit while a family on two incomes of £50,000, raking in a total of £100,000, are keeping theirs – they are dramatically reducing incentives to earn more for parents on between £50,000 and £60,000 a year.

The reason is that child benefit is clawed back at a rate of 1pc for every £100 of income above £50,000. Combined with income tax and employee national insurance, and in many cases also student loan repayments (which take away 9pc of extra income), this creates a cripplingly steep effective marginal income tax rate.

Francis Clark, the chartered accountants, have crunched the numbers; the findings are even more devastating than is usually understood.

Someone with three kids and a student loan would face a punitive 75pc marginal tax rate; with four kids this hits 82pc and five 89pc. If you have seven kids and a student loan, a pay rise from £50,000 to £60,000 would actually cost you: your marginal tax rate would be more than 103pc. Even Francois Hollande, France’s economically illiterate socialist president, wouldn’t dream of going that far. So much for incentives and supply-side economics.

It is not just the child benefit changes that are upping marginal tax rates for some earners. There is an increasingly bad problem between £100,000 and £118,000 a year, the range of income over which the personal allowance is clawed back. Millions are being dragged into the 40p tax rate as the threshold at which it kicks in is brought down. Welfare reform will help low earners – but Iain Duncan Smith’s new system, if it avoids an IT meltdown, will be imperfect. Many claimants will see their incentives improved but others will lose out, with higher withdrawal rates. The Institute for Fiscal Studies has calculated that 1.6m people – including single individuals who don’t work, and couples where nobody earns – will see their effective marginal tax rate fall, boosting their incentives. But 1.7m others will see their effective tax rate increased. On balance, this remains probably the best possible reform, but it will be accompanied by some highly regrettable collateral damage.

So what should be done? It is right that relatively high earning people should not be given handouts; the era of hugely expensive universal benefits and mass dependency on the state is coming to an end. But crude, badly thought out means-testing comes with its own insurmountable problems, is making the tax system even more complex and is destroying the link between work and reward.

The answer is to give people a tax break rather than a handout. Families should be able to keep more of their money the more kids they have; this would also eliminate the need for a separate, universal childcare subsidy, as mulled by the Government.

Child benefit should be abolished entirely and replaced by a new Family Transferable Allowance. Every member of a family would have a personal allowance; a working parent would have £10,000 of tax-free income (when the Coalition’s target is met); a non-working partner would get £5,000, which could be given to the working partner. This would, of course, represent a large tax cut (of up to £1,600 per year for families with a stay-at-home partner or with a second earner on a low income) and would need to be phased in. The Coalition is supposedly planning a much more modest version of this. But the biggest change in my proposal is that each child would also have a personal allowance that would replace child benefit and which could be transferred either in whole to one parent or shared between both.

The first child might transfer £5,000; the second £3,000 and so on, slashing the parents’ tax bill by an amount similar to the value of child benefit today. The exact figures make a big difference, of course, but it is the basic system rather than the detail that matters.

The principles of child benefit would be maintained – the idea that it is costly to look after children, and that the state should recognise this – and we would return to the original reason for a personal allowance, which is that subsistence amounts of income should not be taxed, and that the amount required varies depending on the number of mouths to feed.

This policy would reduce the discrimination against one-earner couples, who pay more tax than dual earner families. Just as importantly, a government that wanted to help families with the cost of childcare could do so by hiking the child’s transferable personal allowance, rather than creating yet another benefit – this would help those who pay for external childcare but it wouldn’t penalise stay-at-home parents or those who rely on informal, family-based childcare.

Of course, those with very low or no income wouldn’t gain from a higher personal allowance and would lose from the abolition of child benefit. The way to help them would be to increase the child element of the child tax credit; under Iain Duncan Smith’s planned new system, this would require bolstering the universal credit. It would be vital to get this part of the reform right.

One argument against a transferable allowance, made to me recently by a minister, is that it would slightly reduce a stay-at-home parent’s incentive to go out to work. But the tax code should be neutral: it should neither encourage nor discourage behaviour, and certainly not seek to engineer social outcomes.

No system is perfect, of course, but a Transferable Family Allowance would be a huge improvement on the present nonsense. It is vital that welfare spending be cut – but replacing universal benefits by means-tested welfare leads to terribly destructive marginal tax rates.

The answer instead is to take as little money as possible away from people in the first place, thus reducing the need to compensate one state intervention (tax) by a second one (welfare). It is time for a grand bargain between taxpayers and the state: reduced taxes in return for reduced benefits.